Another Peak Oil Fad

Part One

For 70 years, environmentalists have predicted the world would see diminishing supplies of oil after reaching a peak in production. The peak never occurred and the peak oil fantasy has been put to bed, at least for the foreseeable future, by the emergence of large quantities of unconventional oil as the result of fracking.

Now, environmentalists are suggesting there will be a demand peak instead of a supply peak, where supply outstrips demand.

The Economist magazine devoted two articles and three full pages to this new fantasy. Reading the articles, one could picture environmentalists salivating over a peak in demand, with the demise of the major oil companies, such as Exxon-Mobil, when prices collapsed.

This new fad may be a consolation prize, where, if fracking can’t be stopped, environmentalists can take solace in the pending demise of the major oil companies.

There is one problem with this new fad … it won’t happen.

There may be periods of imbalance in supply and demand, but what’s new about that?

The new fad flies in the face of both the International Energy Agency (IEA) and the US Energy Information Administration (EIA) forecasts of growing demand.

The EIA forecasts world demand will grow from 87 million barrels per day (Mb/d) to 112 Mb/d in 2040¹. The IEA has a similar growth forecast. Drill Rig. Photo from EIA

This infers a growth in supply of 25 Mb/d in 2040. Where will this increase come from, especially if supply is to outstrip demand, as the demand peak fad requires?

Let’s do a back of the envelope analysis to see where we are headed until 2020, and then think about the period 2020 to 2040.

North America, 2020 vs 2013:

Increase in supply	+5 Mb/d
Increase in demand	-1 Mb/d
Total excess supply	+6 M/b/d

The increase in supply primarily comes from unconventional sources in the U.S. and Canada, while. Mexico’s output is likely to decline slightly. This represents an increase of about 0.7 Mb/d each year, about the same as over the past few years.

The decrease could come from LNG replacing diesel fuel for long haul trucks. This is a more aggressive forecast than others have made. Citigroup, for example, forecasts 0.3 Mb/d displacement of diesel by LNG in 2020.

While the Economist magazine made much ado about improved gasoline mileage, the improvements will largely be offset be population growth².

Persian Gulf Countries, 2020 vs 2013:

Increase in supply	+3 Mb/d
Increase in demand	+2 Mb/d
Total excess supply	+1 M/b/d

The increase in supply will primarily come from Iraq with a slight increase from Saudi Arabia. Saudi Arabia is producing around 11 Mb/d and is hard pressed to increase by much more than a 1 Mb/d. Saudi Arabia also has a serious domestic problem in providing services to its growing population, which will increase demand.

Iraq’s ability to increase oil production is problematic, but is given the benefit of the doubt in this back of the envelope analysis.

Iran, Kuwait, UAE will see only slight increases in supply, offset by increased demand.

North Africa, 2020 vs 2013:

Increase in supply	-1 Mb/d
Increase in demand	+2 Mb/d
Total excess supply	-3 M/b/d

Libya will be hard pressed to maintain current output. Events in Egypt are likely to lead to less supply while demand increases.

Cairo Souk. Photo by D. Dears

Europe, 2020 vs 2013

Increase in supply	+1 Mb/d
Increase in demand	+1 Mb/d
Total excess supply	0 M/b/d

Europe, including Russia, will see some slight increase in oil production, primarily from Norway, with Russia hard pressed to maintain current output due to large infrastructure problems.

Europe’s rejection of fracking will prevent any improvements in both oil and natural gas supply, with the possible exception of the UK which may accept fracking.

Europe’s CO2 disease is impeding growth and corresponding increase in demand. Europe’s economic malaise may have given rise to the new peak oil fad where supply outstrips demand.

Rest of World

While the sum of these estimates would indicate a surplus of supply, it’s necessary to look at the rest of the world in Part 2 to arrive at a conclusion.

Notes:

1. ExxonMobil forecasts 113 Mb/d in 2040.
2. Population growth of 0.9 percent per year with concomitant increase in number of vehicles. Mpg improvements from today of approximately 25 mpg to 48.7 mpg in 2025, an 8% annual improvement.

Part Two

In part 1, it appears as though there will be an excess of supply due to the events in North America.

Even the oil minister of Saudi Arabia voiced concern over the unexpected rapid increase in the supply of unconventional oil.

But that’s without seeing what is happening in Asia.

Great Wall of China. Photo by D. Dears

China, 2020 vs 2013

 

Increase in supply	+1 Mb/d
Increase in demand	+5 Mb/d
Total excess supply	-4 M/b/d

Automobile sales have increased 10% per year for the last few years, with sales in 2013 equaling or exceeding this rate. Oil consumption increased 7% per year since 2009, while natural gas use in vehicles tripled.

It’s pure conjecture whether China’s supply of oil will increase substantially as the result of fracking by 2020, but a 1 Mb/d increase is possible.

Until fracking produces large supplies of natural gas, China will have to import expensive natural gas. Recent natural gas consumption has been increasing by 20% per year, and the government has been encouraging its use in transportation. The number of natural gas vehicles in China has tripled over the past 3 years. Much of this has been CNG in western provinces where natural gas supplies are prevalent, though LNG is beginning to find its way into the eastern part of the country.

The prospects for LNG usage in trucks, fleet vehicle, barges, and, to some extent, passenger cars, are very favorable.

Using Natural gas for trucking could erode the use of diesel fuel, by perhaps 1 Mb/d in 2020.

The confluence of these events should result in demand for oil increasing by around 5 Mb/d in 2020.

 

India, 2020 vs 2013

Increase in supply	0 Mb/d
Increase in demand	+2 Mb/d
Total excess supply	-2 M/b/d

Recent automobile sales have been stagnant. Recent growth in oil consumption has been about 0.2 Mb/d.

India imports large amounts of expensive LNG, but it seems to be having little effect on displacing oil for light vehicles and trucks.

Remainder of world:

It would appear that oil supply and demand for the rest of the world will be in balance through 2020.

 Summary

A cursory look at these estimates, parts 1 & 2, establishes that what happens in North America and China determines whether supply and demand remain in balance between now and 2020, assuming no major conflicts.

Adding the pluses and minuses of excess oil supply through 2020 indicates a near perfect balance.

Forecasts beyond 2020 are speculative, but the above back of the envelope exercise in forecasting supply and demand should create confidence in the EIA and IEA forecasts through 2040.

Key events after 2020 are likely to include:

• China’s population plateauing at around 1.4 billion (2030)
• North America’s unconventional oil production leveling off, with only small annual increases
• India’s population increasing from 1.2 billion to 1.5 billion, a substantial, if not explosive growth rate.
• Africa’s population exploding from 1 billion to 1.8 billion by 2040.

Population growth in India and Africa could accelerate demand, but are wild cards.

• India lacks resources except for coal, and has a poorly developed energy infrastructure.
• Sub-Saharan Africa can best be described as a mess

The EIA and IEA forecasts, and the potential for even greater demand from India and Sub-Saran Africa, throws cold water on the environmentalists’ dream of a new peak oil, where a peak in supply outstrips demand, as explained in The Economist magazine.

If, however, environmentalists are able to curtail fracking in North America, there will be an entirely different outcome, where demand outstrips supply … and that will have negative consequences.

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